US real gross domestic product (GDP) increased at an annualised 5.9 percent rate in the fourth quarter of 2009, after increasing 2.2 percent in the third quarter, according to estimates released today by the Bureau of Economic Analysis. The fourth-quarter growth rate was revised up 0.2 percentage point from the advance estimate released in January.  Economic growth accelerated to the strongest pace in more than six years late last year, as revisions showed businesses slowed inventory reduction and boosted spending, but consumers spent less than first estimated.

The increase in real GDP in the fourth quarter primarily reflected positive contributions from private inventory investment, exports, personal consumption expenditures (PCE), and nonresidential fixed investment.  Imports, which are a subtraction in the calculation of GDP, increased. The acceleration in real GDP reflected a slowdown in the rate at which business drew down inventories. While inventories were drawn down for the seventh straight quarter, the drawdown was much less than in the third quarter. In addition, business investment rebounded, primarily due to a sharp pickup in equipment and software.

Motor vehicle output added 0.44 percentage point to the fourth-quarter change in real GDP after adding 1.45 percentage points to the third-quarter change.  Final sales of computers subtracted 0.01 percentage point from the fourth-quarter change in real GDP after subtracting 0.08 percentage point from the third-quarter change.

Real personal consumption expenditures increased 1.7 percent in the fourth quarter, compared with an increase of 2.8 percent in the third.

Revisions: Upward revisions to inventory investment, exports, and business investment in equipment and software were partially offset by an upward revision to imports and downward revisions to consumer spending and to state and local government spending.

Prices: Prices of goods and services purchased by U.S. residents rose 1.9 percent in the fourth quarter, after rising 1.3 percent in the third quarter. Energy prices slowed, while food prices were unchanged. Excluding food and energy, prices rose 1.3 percent after rising 0.3 percent.

2009 GDP highlights: Real GDP declined 2.4 percent in 2009, unrevised from the advance estimate. In 2008, growth was 0.4 percent. The 2009 downturn reflected downturns in business investment and exports and larger declines in inventory investment and consumer spending in 2009 than in 2008.

Finfacts contributor and professor at the Smith School of Business at the University of Maryland, Peter Morici, commented before the release of today's data: "Friday, the Commerce Department will issue a revised estimate for fourth quarter GDP growth. The advance estimate issued in January was 5.7 percent, and the consensus among forecasters is for no change. My estimate is 5.6 percent, owing to some revisions in the export and import statistics.

Fourth quarter GDP growth was pumped up by a slower place of inventory draw down--in the arcane world of GDP accounting a slower pace of depletion adds to growth.

Demand for U.S.-made goods and services--the key to sustainable growth—added only 2.3 percent to growth. Domestic demand--less a bump in net exports that is not likely to be sustained—added only 1.8 percent.

Looking ahead, data are not encouraging.

A bullwhip effect on inventories will add to first quarter growth--restocking a different selection of goods and services for a scaled back consumer, home buyers and auto buyers. However, retail sales indicate sustainable domestic demand is growing slowly, perhaps at an inflation adjusted rate of 2 percent.

Auto demand has recovered, pushing up production, but further increases are unlikely.

New home sales and starts have been trailing down the last six months, commercial construction remains very weak, and businesses are not investing a lot other than in technology goods and software. Soundings from suppliers in the construction trade and small manufactures are simply not encouraging, outside the auto patch and high- technology manufacturing.

Weekly new jobless claims remain above 450K, when below 350K is considered healthy. Manufacturing is showing some ginger, thanks to stronger car production and leaner methods in technology-intensive industries. However, new car sales are not strong enough to drive further expansion of production, and factories appear able to make do with existing workers or even few workers in other industries. These days it takes a lot of new demand to cause anyone to hire.

Uncertainty about President Obama’s health care and tax plans, as well as Secretary Geithner’s inability to grasp and address real weakness among the 8000 regional banks and the adverse effects of China currency peg and resulting U.S. trade deficit, are causing great unease. Fear is gripping many smaller businesses, belying indicators reporting sentiments of larger firms and multinationals.

Overall, significant and substantial improvements in two areas--trade and bank performance--are needed and do not appear to be forthcoming.

Businesses need customers and capital and without an improvement in the trade deficit, they won't have more customers. The regional banks have too many troubles to make many new loans. Geithner does not seem focused on these issues or effective where he is focused—for example, China’s repudiation of meaningful revaluation of the yuan and Congressional rejection of the Volcker rule.

Most of second half GDP growth that was not attributable to the inventory adjustment went to bank bonuses. Those profits were earned with inexpensive Federal Reserve credit and represented financial churning more than real growth." 

"China's undervalued currency is a millstone around the rock of the US economic neck. If China won't revalue its currency, we should revalue it for them," Peter Morici from University of Maryland told CNBC Friday. Michael Browne from Sofaer Global Research joined the discussion: